Stress Test

Stress Test

How severely will the worldwide steel glut affect the Iron Range?

Once again, the strength of Minnesota’s iron-mining industry and the fortitude of its workers are being put to the test.

With the U.S. economy improving and auto production up, the Iron Range should be looking forward to good times. Instead, 2015 finds the industry facing many uncertainties.

On Feb. 23, Magnetation LLC, which makes taconite pellets from old mine tailings, announced that it would temporarily shut down its plant in Keewatin by late March. The Grand Rapids-based company is one of the newest players in Minnesota’s taconite industry, having opened its first plant in 2008. It also had been one of its most successful; it opened a fourth Iron Range facility in December, and another in Indiana three months earlier.

The news from Magnetation follows an announcement in late January from Mesabi Nugget in Chisholm, which said that its iron processing facility would be closed for six to eight weeks due to slowing demand.

All of this is because of a worldwide glut of steel, which also means a global surplus of iron ore. Since 2011, ore prices have dropped by two-thirds, to about $62 per ton in February—too low a price for some Minnesota facilities to profitably produce pellets. As of mid-February, the U.S. steel industry was producing at 72.6 percent of its full capacity, according to the American Iron and Steel Institute (AISI). In January, the World Steel Institute reported that utilization of steel produced was 72.5 percent. In 2014, the U.S. imported 28 percent of its finished steel. In January 2015, according to AISI figures, that number hit 32 percent.

So do the Magnetation and Mesabi Nugget shutdowns represent a short-term correction? Or something longer-lasting?

Repeat of 1999-2001 woes?

In May 2014, the Washington, D.C.-based Economic Policy Institute released a report with the portentous title Surging Steel Imports Put up to Half a Million U.S. Jobs at Risk. The report noted data that showed that steel production revved up during the boom times of the century’s first decade. China in particular ramped up, opening new mills to help feed its mammoth manufacturing machine. When the global recession hit in 2008, steel producers were suddenly at overcapacity.

Shortly after the Economic Policy Institute report came out, the Duluth News Tribune cited observations from Robert Scott, one of the report’s authors. Scott said that the looming crisis could be as bad or worse as the last major steel industry decline from 1999 to 2001, when a flood of imports helped push more than 30 U.S. steelmakers into bankruptcy. (President George W. Bush responded in 2002 by slapping a tariff on imported steel, which stayed in place until December 2003.)

During the crisis, Minnesota taconite production dropped from nearly 45 million tons in 2000 to 31.6 million tons in 2001. LTV Steel Mining, one of the biggest taconite operations on the Iron Range, was one of the casualties of the crisis, shutting down its operations at Hoyt Lakes in 2001.

Iron Range ore production hasn’t returned to that 2000 number, much less the historical high of 54.4 million tons in 1979. But it’s in much better shape than 2009, the industry’s low point, when production dropped to 17.1 million tons.

In at least one respect, the Iron Range has reason for cautious optimism. “In the past decades, the iron-mining industry has become more vertically integrated,” says Craig Pagel, president of the Duluth-based Iron Mining Association of Minnesota. “Steel companies own their own raw iron ore resources to help reduce impacts of price fluctuations.” Steelmakers U.S. Steel and ArcelorMittal own taconite facilities on the Range; AK Steel’s part-ownership of Magnetation’s Grand Rapids plant provides it with a direct supply of iron.

Nearly all of Minnesota’s taconite pellets are used for U.S. blast furnaces located primarily along the Great Lakes. Minnesota ore is used in 80 percent of the United States’ “first-pour steel” for automobiles, trucks, appliances and pipe, among other heavy-duty uses, Pagel says.

According to James Fox, executive director of trade publication Steel-Insight, Minnesota mines aren’t directly affected by the global cost of ore because their market is almost entirely domestic. Importing ore “doesn’t make sense logistically,” Fox says. But the mines are tied to the fortunes of the domestic steel industry, and as Fox notes, those fortunes have been declining. Starting in late 2014, demand from the energy market “has gone through the floor,” as the prices for petroleum and natural gas have slowed energy production and thus reduced the need for steel pipe. At the same time, steel buyers have excess inventory from domestic and foreign sources. “You’re getting an inventory correction that’s bringing down American prices,” Fox says. U.S. producers have laid off workers and even idled plants until demand improves.

The U.S. steel industry also is no longer dominated by the big blast-furnace firms. The 1980s saw the rise of “mini-mills” in the United States, whose high-efficiency electric arc furnaces (EAFs) melt scrap metal into new steel. According to AISI, the EAFs produce about 60 percent of America’s steel. One notable attribute of mini-mills for Minnesota is that they don’t use taconite pellets. So as Pagel notes, there is a move among Range mines to look at value-added iron products like direct reduced iron, or DRI, which has a higher iron content than traditional pellets. (Pagel adds that blast furnaces will continue producing steel from pellets.)

Already producing DRI pellets is Mesabi Nugget near Hoyt Lakes, 81 percent of which is owned by Indiana-based mini-mill operator Steel Dynamics. (Steel Dynamics’ Mining Resources plant, which it co-owns with Magnetation, supplies iron to Mesabi Nugget.) Another company that could begin producing DRI pellets is Cleveland-based Cliffs Natural Resources, a longtime presence on the Range and the supplier of roughly 60 percent of the pellets used in U.S. steel making. Its Northshore Mining facility in Silver Bay has tested this possibility.

In a sense, Cliffs reflects the industry tumult. Last year, the company battled New York City-based Casablanca Capital for control of the company, a fight that Casablanca won. The hedge fund won the proxy fight, dumped the previous leadership, and named Brazilian-born metals industry veteran Lourenco Goncalves as Cliffs’ chairman, president and CEO in August.

Since then, the company has been looking to shed underperforming assets, notably coal fields in Alabama and West Virginia, and an iron mine in Quebec. It instead wants to focus on its U.S. iron mines, particularly those in Minnesota. During this time of tumult, Cliffs’ stock has tumbled from $100 in 2011 to $25 at the beginning of 2014 to around $7 in mid-February.

In February, Goncalves told a gathering of Range businesspeople in Virginia that no foreign iron ore producer can get its product to U.S. steel mills as efficiently as U.S. producers in Minnesota and Michigan. Still, the question remains: How much ore will those steelmakers need?

Room for more?

Goncalves has expressed irritation at the proposed taconite plant in Nashwauk that’s slowly being constructed by Essar Steel Minnesota. After a lull, Essar Steel Minnesota restarted work at the former Butler Taconite site to produce taconite pellets. The project, which began in 2007, was scheduled to open in 2012, and the original plans were to produce DRI pellets and even finished steel.

Minnesota legislation in 2007 allocated $66 million for roads, railroad tracks and utilities to the Essar site. But that money was tied to the company also producing DRI pellets and steel.

This year, Essar is asking the Legislature to postpone repayment, adding that it plans to open the facility in 2016. Goncalves has questioned why the state is subsidizing a competitor while his plants and others are facing uncertain demand.

Another stressor that Iron Range taconite plants are facing is water regulations. In February, U.S. Steel, which owns the Minntac and Keetac taconite operations, protested potential new standards in a draft environmental permit for the Minntac facility in Mountain Iron. The permit is expected to include a discharge limit of 10 milligrams of sulfates (a mining byproduct) per liter to protect wild rice waters. In letters to the Minnesota Pollution Control Agency, which is reviewing the permit application, U.S. Steel said that the standard would create a “significant hardship” on its operations. Since this proposal could affect all taconite facilities in northeastern Minnesota, Range legislators worry that the “10 standard” will be too onerous for these plants to meet.

All told, it’s a tempestuous time on the Iron Range, a region historically vulnerable to boom and bust. Minnesota’s iron mining industry has been remarkably resilient throughout its history. When natural ore began to run out after World War II, the Range made up for it with taconite. Taconite has been expected to run out from time to time, but the mining companies always have found more.

To be sure, the industry employs fewer people than it did in the high-water year of 1979, when more than 14,000 people were working in iron mining in Minnesota. But the 4,452 workers who remain, as of the second quarter of 2014, hold solid middle-class jobs. The Minnesota iron ore industry is now facing another critical test. How strong will it need to be?

Gene Rebeck is a Duluth-based freelance journalist who writes monthly for Twin Cities Business.